Amazon reportedly prepping a smartphone – will it cost more than the Kindle Fire tablet?

Rumors that Amazon is working on an own-brand smartphone to compete with Apple’s iPhone and numerous devices based on Google’s Android platform were resurrected late Thursday. Citing multiple anonymous sources, Bloomberg reported that the Seattle, Washington-based retail giant has plans to extend its hardware business with an Amazon-brand smartphone that is currently in development with manufacturing partner Foxconn International. Foxconn, the well-known gadget assembly giant, also worked with Amazon on its popular Kindle Fire tablet. Like the Kindle Fire, Amazon’s smartphone would likely be based on a heavily customized version of Google’s Android operating system. Unlike the company’s tablet, however, Amazon may employ a drastically different sales strategy that relies on adding value rather than undercutting rivals on price.

Numerous industry watchers agree that the Kindle Fire tablet became an instant success thanks in large part to the tablet’s rock-bottom pricing. Compared to the $499 price tag on the entry-level third-generation iPad, the $199 Kindle Fire is a bargain. Even Apple’s discounted previous-generation iPad 2 costs twice as much as the Kindle Fire.

Strategy Analytics analyst Neil Shah postulates that Amazon may adopt a radically different strategy with its smartphone. In a post on Twitter, Shah suggests that the company might offer its smartphone at a higher price point than most would expect considering Amazon’s history, but the company could bundle the device with data service.

Specifically, the analyst suggests Amazon might charge $249 for the handset bundled with six months of 4G LTE data. That price point would make the phone 25% more expensive than the Kindle Fire tablet. Shah notes that this strategy would indeed be disruptive, but also quite risky in terms of return on investment.

“Amazon has in the past successfully sold devices bundled with 3G capabilities such as Kindle 3G. Furthermore, in Japan Amazon is acting as an MVNO partnering with NTT docomo and selling prepaid LTE SIM cards & data plans along with devices it sells through its online store,” Shah told BGR. “So now if Amazon is planning to enter smartphone segment, it has to come up with something disruptive at least in terms of providing more value to the consumers and differentiating itself.”

Shah notes that his example of including bundled data with a subsidized Amazon smartphone would be aggressive. Giving away free data could be a unique way to lock customers in and encourage them to buy other Amazon, but it’s risky.

“This ‘freemium based’ model could work for Amazon but to be successful the online retailer will have to nail the ROI economics or it could end up being a disaster,” Shah said, adding that another less aggressive business model might be to partially subsidize monthly data plans for customers who purchase the new phone and subscribe to Amazon Prime.

Amazon’s goal is clearly to put hardware devices in the hands of consumers that make spending money on Amazon products and services as easy as possible. Selling a tablet at little or no margin is one way to accomplish that goal, but the company’s rumored “Kindle phone” may soon explore an entirely different model.